Knowledge markets : implications for innovation, welfare and policy design

Abstract

The object of study is the exchange of knowledge between agents of the private sector and its implications for innovation, social welfare and economic policy. The exchange of knowledge is of great importance, in particular with respect to innovative activity. New Growth Theory for instance relies on knowledge externalities to provide the micro-foundations for their central notion of external scale economies, and Geographical Economics uses the concept of local knowledge spillovers (LKS) to explain the phenomenon of geographical clustering of economic activity. Nonetheless, as many studies in these fields point out, the exact mechanisms through which such knowledge externalities work are not well understood. In this work it is argued that the key to understanding these phenomena lies in the special characteristics of knowledge as a factor of production. From this starting point, a new methodology is developed to capture these special characteristics and a formal model of knowledge trading is built. This is then applied to topical issues in economic theory. The results turn out to be highly instructive for policy design to foster growth and social welfare and offer a meaningful alternative to existing approaches in the literature. In summary, therefore, this work is a contribution towards a better theoretical understanding of the micro-foundations of and the forces at work in knowledge economics. The argument is structured into nine chapters. In chapter 2, the analysis turns to the properties of knowledge and knowledge exchanges in economic activity. Here a definition of knowledge is provided and its special characteristics and their implications are identified. This provides a conceptual framework for the rest of the argument and introduces a system of definitions and terminology in an area which has suffered from a lack of consistency in the use of terms. Chapter 3 turns to the analysis of knowledge transfers between agents. In the first part of chapter 3 the concept of LKS is defined and its importance for the theory of geographical clustering as well as for New Growth Theory is discussed. Secondly, the theoretical and empirical literature on LKS is surveyed. Finally, chapter 3 offers a new fundamental critique of the concept of LKS. In order to justify the regional boundedness of LKS, its proponents emphasise the tacit nature of knowledge that spills. By definition, however, the transfer of tacit knowledge requires the personal participation of the sender, which gives the latter a degree of control over its transfer and makes the knowledge in question excludable. While being sufficient to prevent the spillover of knowledge, excludability does not ensure its tradability in a market. For this it is required that the sender can control the diffusion process of knowledge after having shared it with other agents. Hence, the discussion in this chapter leads to the insight that the two parameters that determine the tradability of knowledge are its excludability for the sender and the latter´s ability to control the knowledge diffusion process. Based on the considerations in chapters 2 and 3, the argument builds a new approach to modelling knowledge in economic activity. For this purpose, in chapter 4 a new methodology is developed to capture the special characteristics of knowledge. Building on this, chapter 5 develops a general model of knowledge production and trading. Chapters 6 and 7 then go on to develop extensions and applications of the model. Chapter 6 explores M&A activity as an alternative to knowledge trading. Chapter 7 presents an extension of the model to imperfect information and an application to the phenomenon of geographical clustering. In chapter 8 the analysis turns to the welfare implications of different types of market mediated knowledge exchanges. Excludability and control over the diffusion process of knowledge are identified as the relevant targets for policy-makers. Finally, the analysis of the determinants of the policy targets yields a set of implications for policy design for national and regional policy makers. To conclude, chapter 9 summarises and interprets the main results and outlines a research agenda based on the findings of this work.